According to the formula recommended by the Shyamala Gopinath committee on small savings, the PPF rate should be 25 bp higher at 7.75%. The Senior Citizen’s Saving Scheme, which escaped a cut when rates cut in December, could see the rate rebound 20bp to 8.5%. The Sukanya Samriddhi Yojana rate could be raised by 15bp to 8.25%.
The Gopinath panel suggested in 2011 that low savings rates are linked to bond yields. Interest rates on different regimes are expected to be 25 to 100 basis points higher than yields on government bonds of similar maturity, he said. The panel had suggested an annual review, but two years ago the government decided to recalibrate rates every three months. It also removed the 25 basis point markup for instruments competing with bank deposits, including time deposits, recurring deposits and the Kisan Vikas Patra.
Higher rate expectations
However, observers also say that the Gopinath panel formula is not being followed very closely. Interest rates on most small savings plans were reduced by 20 basis points in the previous quarter, even though the average yield on 10-year bonds in the December quarter was 45 basis points higher than that of the previous one. The PPF rate in the December quarter was 7.8% while the yield on 10-year bonds had averaged 6.52% over the previous three months.
Pricing formula not always followed
Analysts expect bond yields to rise further.
“Bond yields are expected to increase slightly in the new fiscal year, when the Centre’s borrowing plans become clearer and fiscal costs are factored in,” said Radhika Rao, Indian economist, DBS Bank, and Eugene Leow, rate strategist, DBS Bank. Over the past month, many banks have increased their deposit rates.
raised rates on term deposits by 10 to 75 basis points on March 1, prompting other banks to follow suit.